Sony, Nissan profit warnings are reality checks

MayumiNegishi

TOKYO--Surprise cuts in profit forecasts from both Nissan Motor Co. (7201.TO) and Sony Corp. (6758.TO) are giving pause to believers in a corporate recovery in Japan, highlighting the many risks still facing the country's biggest brands.

That came a day after the country's most famous consumer electronics maker slashed its annual earnings forecast by 40% following box office flops and weak sales of televisions put red in its ledger for the last quarter. Sony shares plunged 11% on Friday, and the benchmark Nikkei Stock Average slid 0.9%.

The gloomy talk from two Japan Inc. heavyweights has added a more sober tone to the round of earnings reports for the quarter ended Sept. 30--a contrast with the giddy, sharp upward revisions that dominated six months ago amid a fresh optimism sparked by new government stimulus policies.

After more than two decades of starts and stops, hopes are high that at long last Japan's economy is on a mend. Helped by an ultra-easy monetary policy and fiscal spending, consumer prices, industrial production and machinery orders have risen, and companies are starting to raise corporate investment. The Nikkei is up 37% in the year, as investors bet that this time, Japan will shake off its doldrums.

But the news from Nissan and Sony is supplying a reality check for some short-term investors, economists said. That's all the more so since both companies had blamed the strong yen for past woes.

"There are still so many uncertainties ahead: the health of the economies in the U.S. and in China, the impact of the sales tax hike next year, and then there are the individual risks each company faces," said Yoshihiro Okumura, general manager at Chibagin Asset Management.

That said, Sony and Nissan alone will not dent interest in Japan from long-term overseas investors, he noted. "It's just that the winners and losers will become very clear," he said.

Sony and Nissan are two of the big stand-outs in an earnings season that is still relatively upbeat. Based on results logged by the 532 companies listed on the first section of the Tokyo Stock Exchange that reported second quarter earnings results as of Thursday, net profit at non-financial firms nearly quadrupled in the April-September first half from a year ago, helped by a yen that at the end of September was 26% weaker than a year ago, according to SMBC Nikko Securities Inc.

The weak yen has been a crucial driver in higher earnings and stock prices for the export-led economy, as the cheaper currency makes Japanese goods more competitive in global markets.

Led by electronics and auto sector firms, almost 30% of the companies lifted their annual forecasts. But even when they did revise up, Japanese firms were ultra-conservative, considering how strong first-half earnings were. For the full business year, the surveyed companies on average revised up their net profit outlook by a mere 2.4%.

And, like Nissan and Sony, 15% of companies reporting so far have cut their forecasts, despite all the optimistic news.

Machinery makers have led the downward revisions so far, but a clear line divided the winners and losers in the machinery sector as well. Excavator-maker Komatsu Ltd. (6301.TO) cut its outlook on Monday, after logging a profit fall on weak demand for its mining equipment. That was in contrast to rival Hitachi Construction Machinery Co., (6305.TO) which logged a profit rise and kept its outlook unchanged.

If anything, Prime Minister Shinzo Abe's reflation policies and a weaker yen help investors differentiate the exporters that worked hard and whose growth strategies are right from the ones who got their strategies wrong, Daiwa Securities Senior Strategist Eiji Kinouchi said.

"Companies can't use the strong yen as an excuse anymore," he said. "I think this will put pressure on underperforming companies to actually do something."

Write to Mayumi Negishi at mayumi.negishi@wsj.com and Hiroyuki Kachi at hiroyuki.kachi@wsj.com

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